Tuesday, October 27, 2009

Breakeven point

Dear Mr. Tan,
What is an acceptable break-even point for a life insurance policy? I have a policy that breaks even after 20 years, i.e. the cash value is more than the premiums paid. Is this acceptable?

If you are saving your money, the break-even point should be 0 years. This is what you get when you put your money in a bank account. You can withdraw it at any time without penalty.

If you invest in a unit trust with a front end load of 2% (or less), you can break even within 1 year (provided that the stock-market gives a positive return.

A life insurance policy takes many years to break even due to the high commission paid to the insurance agent. If the distribution cost is 50% of the annual premium, it should take 5 years to break even. If it is 100%, it should take 7 years to break even.

I consider a distribution cost of 50% to be rather high, but may be acceptable. Your life insurance policy should take 5 years to break even. If it takes longer than 5 years, it is not good for consumers. There are better ways to invest your money.

However, if the life insurance policy is able to give an attractive yield, compared to other types of investments, you may accept a higher break-even point of 7 years.

Tan Kin Lian

The break-even point is the number of years required for the surrender value of the policy to reach the total amount of premiums paid.


Anonymous said...

Commission, commissiom, commmisssion and it is commission that erodes your saving and protection.
What is saving? If it takes many years what rubbish is saving.

One crap product by ntuc called revosave which purports to pay cashback yearly after 2 years got the cheek to say it is liquid.Put on the bank is more liquid, any time you want you can have it and doesn't take 20 years to break even.It is break even straightaway.
Those who bought Revosave , do have your policy reviewed and examined before you incur more losses becuase you are not going to keep it for 25 years for it to breakeven.If you have been misrepresented or mis-sold get the company to refund all premium or else lodge with MAS or sue the company. This is a crap product that you must not touch with a 50 foot pole.

Anonymous said...

i have NTUC income - retro save and vivo life policies and both have 15 years break even point.... :-( Felt bad after start read your blogs only... Why these policies were allowed in the market? Are they any consumer association to protect the victims fall into these policies or take action?

Anonymous said...

People should wake up to the fact that it is real stupid to buy wholelife and endwoment products.
They are niether good for protection nor as saving plan.The give low protection and poor saving. Must not let unscrupulous insurance agents cheat you.

Anonymous said...

May I know what is "break even" point? and how this information is used?
Thank you, everyone.

Eng said...

Well, after 20 years, I am stuck with paying $2200 annually.. for whole life policy with profits.
Some years ago, newspaper reports about this policy caused the insurer to offer options on the "critical year".
I took the option of using the dividends to pay for my premiums.. but it seems that it will last about 4 years only, till it all runs out.
It was the best option at that time.. the only way i could get money back before I die.

DO NOT BUY INSURANCE!! the number of people dying suddenly and leaving young families is small.

Vincent Sear said...

When reading a typical whole life par projection tables, it's not unsual to see two rows of values asterisked or arrowed with some explanatory footnotes.

1. The breakeven year. This when the cash value accumulated is supposed to equal your total premiums paid throughout the preceeding years.

2. The critical year. This is when the cash value accumulated is supposed to able to sustain the policy till usually age 85 without further premium payments. (Usually whole life policies are automatically premium-free from age 85 if still inforce.)

The breakeven year is quite straightforward even for layman to understand and work it out.

However, the critical year is not that simple. One needs to understand the bonus structure and automatic premium loan interest to work it out. In any case, both breakeven and critical years can be disrupted and delayed by interim cut in bonus or even change in bonus structure.

Anonymous said...

NTUC Vivo life & Revo save has more than 50% of premium goes to distribution costs, unfortunately i can understand after 14 months of payment.. Looks good business for insurance agents..

Anonymous said...

Most people doesn't like the idea of throwing money away and no returns. This is one reason why savings portion was including in whole life policies.

I believe whole life policies have their place, especially for people who are uncomfortable with stocks or unit trust. Term insurance is necessary to give immediate lump sum for family and should be part of a good insurance portfolio.


An Insurance agent.

Vincent Sear said...

I agree with Anonymous 3:40PM. There're people who'd like to have life insurance with modest but reasonable returns. There's a place in the market for whole life and endowment policies.

However, the insurers should be fair with their product design, pricing and projection, and the agents should be fair to their clients with full disclosure.

For those financially savvy and experienced, advocating buy term and invest the rest sounds easy, but it's not so easy for many others to implement.

Anonymous said...

There is a place for WL and endowment!!!
Let me ask who is the adviser? the customers themselves or the agents?
Becuase consumers are dumb taht is why they got conned by agents into buying con products like wholeife and endwoment.
Reasonable return?? why not let manage for you ans I give a reasonable return of 2.5% after donkey years.No wonder the conned poor people remain poor and the rich savvy getting richer.
Thanks to greedy agents and incompetent agents who throw away good money by pushing consumers WL and endowment.

Anonymous said...

Those who bought wholelife and endwoment and anticipated endwoment and regular ILPs, you can have them checked for mis-selling at FISCA.Check your fact find forms for contradictions and inappropriate recommendations. FISCA can help to file for complaint to
the company and MAS or sue the company for refund of premium.

Anonymous said...

Yes, I urge policyholders to get their policies checked at FISCA. You may have wrong products, inadequately insured , useless products and all becuase the insurance agents only have their own interest in mind when they sold or pushed these products to you.
First thing to remember , if you were sold a whoelife or an endwoment there is good chance that your financial interest was never considered. So , it pays to seek help from FISCA to check for mis-selling, misrepresentation, conflict of interest or even cheating.You might be harbouring all these useless products and it is to your interest to check them NOW and not many years down the roads.
You read that many are now in dilemma because they didn't know they were keeping rubbish insurance products until they read Mr. Tan Kin Lian's blog.
So it is better to do it now.
You can even sue the agents or demand compensation from the insurers for mis-selling by the agents. You can lodge with MAS to get errant and rogue and incompetent insurance agents out of circulation before they con more people.Don't waste your hard earned money on these products.

Vincent Sear said...

Some anonymous posters are getting carried away. Please don't put words into the mouths of Fisca volunteers or write the Fisca articles of association and constitution yourself. Fisca is not a law firm. It doesn't help anyone sue anyone. Fisca is not a financial adviser. It doesn't advise anyone on what to invest in, it advises on what the investment in view is about and the decision has to be made by the prospective client with or without the proper agent or adviser.

Anonymous said...

There is no where that implies that FISCA is providing legal advice or is licensed to advise on financial products. The article urges consumers who suspect that tehy have been short changed by insurance agents to seek second opinion and review and have their existing policies checked for mis-selling. This is the implied role of FISCA.
Legal action or actions are decided by the cleints on the advice of the reviewing adviser.

Vincent Sear said...

To: Anonymous 9:38AM & Others

Not to worry, not referring to reasonable postings like yours. I believe that the "carried away" postings have since been "moderated".

James said...

Seriously, Mr Tan, are there any life insurance policies in the market today that can manage to achieve that breakeven point?

Or rather, when you were CEO of NTUC, what were the policies that managed to achieve the breakeven point you laid out and now define as "good for consumers"?

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